Thursday, July 17, 2008

Status

Yes, I'm still here and still watching things fairly closely.

NICK

I've been buying NICK with spare money that I stumble into. They should be releasing the next quarter's results on July 28. I'm hoping that the trend continues and the amount of bad loans continues to shrink, but that might not be the case. I'm buying it for what I believe will happen after the sub-prime smoke clears.

I looked at the details of Wells Fargo's (WFC) latest results, especially to look for how much things continue to deteriorate. Things don't look very bad for them, even when you take into account their changes to categories of non-performing loans. From what I've read, they've steered clear of a lot of the garbage going on.

Year-to-date total net interest income, for example, was up $1.8 billion from the first half of 2007, roughly equal to the increase in net charge-offs for the same period, even after adjusting charge-offs for the impact of our National Home Equity Group’s new charge-off policy. Few other large financial institutions have had the capacity to realize the opportunities generated by the credit crisis, and if opportunities to add attractive assets, add new customers and gain market share and wallet share continue, the long-term benefits could very well last beyond the peak in credit costs.”

This is the sort of thing I hope to see from NICK, but I doubt it. I took a quick look at CACC and ACF and both seem to be weathering things well [so far], although I didn't look too closely at the details.

For years I've been saying that NICK won't reach full value until after the whole sub-prime issue hits and passes over.

Strathmore Minerals and Uranium

The interesting thing about Strathmore and uranium in general is how things are playing out pretty much as expected, yet with the changes in stock prices and uranium prices, it can be difficult to see that. The long term price of uranium dropped somewhat, which was worth noting, but what I worry about is some big change to the fundamentals of uranium being a good long-term investment: Strathmore Minerals in particular. I see nothing different than what I saw when I first started buying Strathmore 3 years ago. Demand is going up, supply is not matching it, there are issueslimiting supply. The US quietly moved a million pounds of yellowcake out of Iraq and gave/sold it to Cameco, but India is severely running out of uranium (they need millions of pounds). If they strike a deal with someone and are able to buy all that uranium, it's likely to impact the near-term balance of supply and demand.

What I didn't like from Strathmore was them selling their Chord property for what seems like a cheap price. The property had about 2 pounds per ton of uranium in what seems like a farily decent depth and surroundings. It sold for a little over a dollar a pound in the ground. Based on Strathmore's financials, they didn't seem to need the cash. Also there was the issue of terminating the agreements with Yellowcake Mining on the Sky, Jeep, Conoco Files projects. They're still doing Juniper Ridge.

Fission Energy is still working on the drilling near Hathor's "roughrider" zone. Hathor found some more uranium at what seems like serious concentrations, but don't yet know exactly how much.

CFRI, CVU

No news from CFRI. When something happens, they'll definitely trumpet it. How long success for them takes is far less important to me than whether things are successful. I follow the World Cargo News headlines looking for anything that might change the picture. Everything looks fine so far in terms of not seeing anything unexpected that might ruin the CFRI's success.

CVU has been quietly winning business. However, they had a revision to the big Spirit AeroSystems MOU (they're doing the leading edges, not trailing edges) which doesn't impact the short term, but probably cuts down on the long term. CVU won't go anywhere until/unless they get a huge jump in orders based on planes coming back from the Middle East and a clear indication of a sustained increase in business. Iraq may start winding down soon, although there's likely to be some increase in activity in Afghanistan.

Overall

I spent some time looking through the FDIC database to see the financial state of banks overall and in key places like Florida. Local banks in Florida are doing badly. If I recall, only 40% of the are currently profitable. As a whole, they're making essentially no money right now and there's a lot of non-performing loans. Overall in the US, however, the banking system seems to be doing reasonably well, especially considering all the negative hype.

The fact that Berkshire Hathaway's price has gone down rather than up, tells me that the market is just depressed. In my opinion, the value of Berkshire increases as the overall stock market deteriorates due to having more opportunities for Buffett to find something good. The guy is seriously at the peak of his investing ability right now.

I'm happy with all my investments.

UPDATE next day:Unlike Wells Fargo, CitiGroup is a whole 'nother story, with a big loss rather than merely lower profits. Their customers are obviously very different from NICK, but this caught my eye:

Results improved substantially versus first quarter 2008 due to lower write-downs and good performance in the core franchise.

Glad to know you're still around. NICK and ACF both look very interesting. ACF is selling for 2.5x what it earned last year and half of book, and this is a 18-20% ROE player.

The smart folks at LUK took a sizable bite of this.

But ACF and NICK differ on some points, like ACF loans are $18 to $20k versus $8k for NICK, APRs are 15%-ish for ACF, but more like 24% for NICK.

ACF is apparently less subprime than NICK.

The only problem with this is that these guys' default rates and charge-offs probably don't correlate to the recent disaster at the banks.

I bet these guys' credit is much more directly linked to unemployment and the real economy than what's been happening at banks recently.

The banks got hit firstly by the financial games (CDOs etc...), and the subprime hit was from sloppy loans, fraud, bubbled up real estate prices etc...

None of these factors really drove the loan books at NICK and ACF, I don't think.

Sure, they've felt some effect from the general slowdown, but if a real recession hits (well, it's real enough) in the sense of a serious uptick in unemployment rates, then these guys can really get killed.

The other worrisome thing is that on the conference call today, Jamie Dimon (JPM) said prime mortgage charge offs can triple from here. TRIPLE. And this is PRIME.

That's a bit scary.

But anyway, these stocks are usually good buys when they get cheap like this, IF they survive.

With LUK behind them, ACF may be fine...

Anyway, this may be a good high uncertainty, low risk play (ala Pabrai).

My thinking on comparing bank default rates with sub-prime auto default rates was that people have cars and mortgages. Also, the FDIC data and the Wells Fargo results have breakdowns on types of loans.